Shurgard Self Storage Ltd (SHUR) Earnings Call Transcript & Summary

Good day, everyone, and welcome to today's Shurgard Self Storage S.A. H1 2022 Results Earnings Call. [Operator Instructions] Please note, this call may be recorded. [Operator Instructions] It is now my pleasure to turn today's call over to Caroline Thirifay. Please go ahead. Your line is open.

Thank you, Ashley. Good morning, everyone. Thank you for joining us for the H1 2022 results. I'm here with Marc Oursin and Jean Kreusch. Before we begin, we want to remind you that all statements other than statements of historical fact included on this call are forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected by the statements. These risks and other factors can adversely affect our business and future results that are described in our earnings call -- earnings release and in our publicly reported information. You can find our press release and an audio webcast replay of this conference call on our shurgard.eu website. With that, I will turn the call over to Marc.

Thank you, Caroline, and welcome, everybody, to this earning call. I'm happy -- I'm very happy to share with you that these numbers that are great. So starting with our first slide. Our strong results are coming first from the growth of the revenue. We have been able to reach 12.3% of growth for the total company, and this is mainly fueled by rate growth and slightly by occupancy. I'll come back to that later. On the margin side, so we've been able to grow for the half year by 16%. And this is due mainly to the growth of revenue and the good grip we have on the cost. And if you look at more precisely, the same-store pool, here, you have actually a growth of revenue of 9.1%, which is definitely coming from a very strong growth of our rates for this pool of stores and slightly from occupancy. So that's really a value effect versus a volume effect. Knowing that, by the way, our same-store pool is 95% of our revenue. And then -- well, all of that translated into a significant increase of our margin, 2.5 percentage points, which is quite logical. I mean strong growth on the revenue, cost under control, so mechanically, margin is growing. And we had a growth also of 15.3% of our adjusted EPRA earnings, reaching EUR 64.5 million for the half year. And this is excluding the noncurrent income that we had in '21 coming from insurance reimbursement. And then as we said during our last call, our dividend per share for the year will be EUR 1.17 a year, and therefore, for the half year, it will be half of that. So EUR 0.58 per share for this payment. That will take place in September -- at the end of September this year. So let's go to the next page. So let's talk about the pipeline. So the pipeline is strong and is growing, which is exactly what we have said, and this is what we are doing with the teams, and that's great. So '22 started with the opening of our property in Paris called Lagny on the east side of Paris region. And then we have 5 others that would take place mainly at the end of this quarter in Q4 in North Rhine-Westphalia, so for that one, we were using these 3 letters quite often. For the non-German speakers, it's mainly the west side of Germany, Cologne and Düsseldorf area to make it simple. In Randstad, we are talking about the Netherlands here, which is mainly the square of Amsterdam, Rotterdam, Utrecht and The Hague and also Paris. So these properties will take place there. And we are expecting at maturity a rate and a return yield of 7% to 8%, knowing that naturally for us it is usually 4 to 6 years depending on the size of the property. We have also acquired in Central London one property earlier this year in Q2 for EUR 7 million, resulting in attractive return of 7% to 8%. Then '23, '24 starting to fit strongly the pipeline, where we have 5 projects for 12,000 square meters that are actually in the pipe redevelopment, so in Munich, Randstad again, Stockholm and London. And on the top of that, we have 9 projects, which is already 46,000 square meters in the same areas on the top of what I said, so plus Paris and also Berlin and Stuttgart, where we have also other projects. Then what is interesting to note is that the acceleration of the growth of this pipeline, it was 6% at the end of Q1. Now it is 7% of the total net rentable of the company. And this is a short-term pipeline. We're talking about the years '22, '23 and '24. Let's go to the balance sheet. So you know that we have a very strong and robust balance sheet, and that's great, starting with the cash that we have on hand, more than EUR 175 million at the end of June. In terms of capacity of borrowing, we still have a revolving facility of EUR 250 million that's expiring in '25, and that has not been undrawn -- drawn, sorry. And we still have also an uncommitted EUR 250 million, so another EUR 250 million of shelf note facility for a 3-year period. On the top of that, in terms of debt, we have EUR 800 million of senior notes through USPP, so very long term, pretty well scattered. And the next maturity to reimburse will be not before '24, and it will be EUR 100 million. Then if you look at the main ratios of debt, so LTV has reached 16.8% for June. This is mainly to the fact that the NTA has increased. So therefore, the ratio went down or has been stabilized. And then if you look at the more operational ratio on the debt, which is net debt to EBITDA, we are almost at 4%, which was, by the way, the bottom of our guidance that we have given, which is 4% to 5% in terms of that ratio for the debt. The ICR is at 8.5 at the end of June. Then if you look at the valuation of the company, coming from the valuers. So the NTA, so the EPRA net tangible asset per share has reached EUR 38.46. But more importantly, compared to a year ago, it is 24.6%, and this is mainly coming, I would say, 50-50 between compression of the exit cap rate and the improvement of the performance of our properties globally. And then the adjusted per -- earnings per share has reached EUR 0.72 at the end of the semester, which is a growth of 4.6% versus the same year -- same period, sorry, of last year. And then as a reminder, we are clearly a freeholder company. 94% of our portfolio is in a freehold situation. So Q2 will be pretty fast because Q2 is exactly more or less what Q1 was. So it's very stable in terms of performance. If you look at the revenue growth of the company, the NOI growth and the other metrics, it's much -- yes, more or less a copy-paste of Q1. So let's go to the outlook for '22. So you've seen in the press releases that we have disclosed and in our half year report this morning that we have decided to raise up the outlook for the year. As a reminder, we started the year with a 7%, and we were cautious, obviously. And it's not bad. I would say it's pretty good. And therefore, today, based on what we have done in Q1 and then the repetition of that in Q2 and also the fact that the half Q3 is behind us, we are mid-August, which is 6 weeks over 13 weeks for Q3, where we see the same trend in Q1 and Q2, we do iterate the fact that the guidance should be 10% to 12% for our total revenue growth for the year '22 versus the whole year '21. On the top of that, we are pretty confident to develop 49,000 square meters as usual via the 3 levers that we have: so expanding existing properties, what we call redevelopment; opening new properties; and on the top of that, acquisitions that will still take place before the end of the year. And regarding the income tax rate, we expect to be still below 20% for the year '22 based on the adjusted EPRA earnings, which was perfectly in line with the guidance that we have given at the beginning of the year. So on that, I will turn to Jean for more details and more financial specifications.

Thank you, Marc. So looking back at our financial performance for the first half of the year, we continue to show a very strong and steady growth. Our real estate operating revenue for the second quarter and half year grew by slightly over 12% at constant exchange rates. NOI grew by 15.1% for the quarter and by 15.7% for the half year, leading to a margin improvement of 2 percentage points. Our EBITDA grew by 16.6% for the quarter and 15.7% for the half year, demonstrating once more the scalability and continuous digitalization of our operating platform. Finally, if we exclude the impact of a one-off insurance income recorded in the first half of 2021, our adjusted EPRA earnings grew by 17.7% in the second quarter and by 15.3% in the first half at constant exchange rates compared to the prior year periods. On Page 8. Our income from property by segment at constant exchange rates demonstrates a strong growth of our sales and new stores. In our same-store segment, we had a strong 6 months, with an average occupancy at 90.3%, up 0.7 percentage points versus last year. As demand remains strong, we have been able to increase contract rates for existing customers and raise our rates on new customers, leading to an increase of our same-store average in-place rent of 8.7% over 2021. In light of inflationary pressures, we managed our expenses with caution. In the first half of 2022, our same-store operating expenses increased only by 1.9% versus last year, significantly lower than our same-store revenue growth of 9.1%. This was partly due to staffing recruitment delays. However, our e-rental solution has helped us to mitigate any impact on the top line of the staffing shortages that lowered our cost basis in the period. Same-store NOI margin improved by 2.5 percentage points to 64.6%. On Page 9. Our 3 levers of growth are contributing to the 15% increase in NOI, with the same stores growing by 13.5% at constant exchange rates and contributing EUR 11.8 million to the growth while the development and acquisition added another EUR 2.2 million. Now moving on to our cash flow. On the next page, our operating cash flow was impacted by an unfavorable movement in our working capital, mainly driven by lower construction accruals. We invested EUR 57.1 million in development and acquisitions, the dividend and interest. At June 30, our cash balance was at EUR 175.8 million. On Page 11. Our balance sheet remained robust and geared for growth. Our EPRA net tangible assets grew by 11.7% to EUR 3.5 billion, mainly as a result of the positive impact of higher rates and a further compression of the cap rates. On the debt side, no change. The next slide illustrates the strong growth of our EPRA NTA, a 62% increase in 2018 while LTV, net debt to EBITDA and interest coverage ratios underpin our conservative and robust balance sheet. Finally, as Marc elaborated earlier on, we have a very significant pipeline. 7% of our net rentable square meters, up 1% versus Q1, has been acquired, developed, is under construction or under permits. I will now let Marc conclude.

Thank you, Jean. So regarding our conclusions, the first thing I would like to say is the numbers are really good. Second, the platform that we have is still unique in the sense that the geographical spread of it, mainly in Northern Europe, the leadership and the size we have, then the quality of the real estate, the buildings, again, the trio that I mentioned to you, and the capacity to having the leverage we have on this platform is really unique. Secondly, the runway of the company, we are in a market which is still clearly underdeveloped but has an unbalanced situation between demand and supply in favor of the operators and specifically Shurgard, and the fact that our density of population that is where we are, it continues to grow. Our strong H1 '22 performance, I will not come back on that. Jumping with expansion portfolio, we are the one expanding the fastest and the largest. To give you an idea, we -- in terms of square meters opened and developed or acquired, we are more than the sum of the 2 others. And then if you take the active M&A, I mentioned that to you. ESG, the good news were that we got a great score with GRESB last year. And this year, in April, we have been able, from MSCI, to be granted a AA, which is really fantastic for the first time. And all of that supported or embedded within a very robust balance sheet. And in this, clearly, the fact that we have a low level of debt plus the fact that we're in a strong position in cash are really good for us. So I thank you for the listening, and then I will let Caroline introduce, I think the questions.

Thank you, Marc and Jean. Now we open the line to your questions.

[Operator Instructions] We'll take our first question from Thomas Martin with HSBC.

Congratulations to these strong results. I have 2 questions, basically. First, regarding the operating costs. You mentioned that revenue growth was much stronger in the first half than you increased on the cost side. What's the expectation here in terms of cost? Is there any catch-up effect we can expect in the coming months or quarters? So do you expect or do you see signs or signal that cost will rise above the level you have shown in the H1 results? And second question is regarding your debt maturity profile. Can you remind us about your debt, which is due in the coming 2 years, and how you plan to manage that?

Okay. Well, I would -- this is Marc speaking. I will take the first part of your question, Thomas, and then Jean will go on the debt. So for the operating cost expectations used for the second half of the year. When you look at the P&L of the company, the first line is what we call the labor cost, so people in the properties. With the management line, we're managing the staff, and we are looking more or less about 10% of our revenues. And then the second line is real estate taxes. So -- and then you have marketing at around 2.5% and 3%. And then you have other lines for like energy, which is only 1%. So I gave you this proportion in order for you to understand what we are talking about and how we approach that. So regarding the first line, the operational labor cost, if you prefer, we don't expect in the second half of the year of a major catch-up with what we had in the first half of the year. We're going to have probably some people that would be hired, others that will leave. But all in all, we should not have a major change with the trend that we have currently. Secondly, regarding the real estate taxes here, we know them. It's pretty straightforward. So we should not have bad surprises, except if any government is deciding to overtax suddenly real estate and right away, which is really probably not the case. On the marketing side, we have maybe a bit more on the second half than the first half, but maybe a maximum of 50 basis points around that level regarding the share of the revenues. And on the energy, I don't know if you have this information, but what we have done in 2020, which looks to be already -- as I'm sure you got from many people. But if you recall at that time, the price of the liter of gas was less than EUR 1. We're pretty far off what it is now, and we took the benefit of that to renegotiate all our utilities contracts and to go for green actually. So in terms of electricity and also gas. And all the contracts are with fixed prices for the years '21, '22, '23. So we are on the safe side on that, and we don't expect to see any increases coming from that, knowing that, as I mentioned to you, utilities today are 1% of our revenue, more or less. So that's the way we approach this topic. And Jean?

Yes. On the debt side, our next maturity is in July 2024. It's EUR 100 million. That's due to be refinanced at that time. It represents about 12% of our total debt. And currently, that debt has a coupon of slightly above 3%. So we feel really comfortable that the impact is not going to be major on our interest cost.

Thank you, Thomas. We have a similar question from the webcast, [ Christian ] from UBS. What are your expectation of cost development over 2022, 2023? Expenses were well managed this half year. But what would it look like once hiring is ramped up and once inflation comes through in the numbers?

So [ Chris ], regarding the first part of the question regarding the cost of development. So here, we are talking about the market of developers, the builders, the vendors, the guys who are selling the partition, the concrete, foundations of all of that. So yes, there is an increase. And clearly, we -- what we see is it looks like that we have reached the peak in certain markets. We don't see an acceleration of the increases that we experienced at the beginning of this year. It's more stabilizing. It's not yet decreasing, but it's not continuing to inflate, which is good on the development side. Secondly, back to the OpEx. It's more or less what I explained before. I would say that for '23, the difference than the second half of the year, which was the question of Thomas, I think, here, again, on the marketing, I cannot guess. But I would say that we'll be probably more or less on the same trend in the H2 that we'll have for '23. As I mentioned, on the utilities, we are safe until the end of '23. So here, no bad surprises. We are working out actually to prepare '24 on that front. And then regarding the labor cost, which is the major one, 10%, here, clearly, the fact that we have to increase our people more than the past, let's say, 5 or 10 years on average because you have in certain countries indexation that are mandatory. I will take Belgium as an example. Sweden also has this kind of thing. But for the other markets, it's more negotiation at the level of the companies. Here, clearly, we will have more increases than we had in the past. But having said that, you know that we have set up what we call the e-rental, which means that where customers are handing in end-to-end, actually fully digital experience, they've gone on the website, and they browse on that, and then they get their unit more or less. And the contract is done online and paid and all of that, so which means that we are more efficient at the property level. So I believe that the gains of optimization that we will have will mitigate this increase of salaries. Not completely, for the time being, we'll see. But we're working on that, but it will clearly help a lot.

[Operator Instructions]

We have a question from webcast from Marios Pastou, Societe Generale. A couple of questions from my side. What is your current pipeline of potential acquisitions? And who has the increased cost of capital-impacted appetite? That's the first question.

Okay. Sorry. Thank you, Caroline. So regarding acquisition, the pipeline, so you know that still we have not done yet the deals. We don't disclose what we are negotiating because you never know, of course. I mean deal is not signed. What could happen? But globally, we have a pipeline that is pretty active. That is in line with our objectives for the year, and this is what we just repeated. So we are comfortable with the objective that we have said that we should deliver every year 20,000 square meters coming from M&A, which is, on average, more or less 5 to 6 properties that we're able to buy from competitors and to integrate into the platform. So that's one. Secondly, on your question regarding the cost of capital and how this is impacting or not, I would say, the number of transactions or the appetite of sellers and buyers. Well, for the time being, I would say, it's still -- because you know that most of the properties that are, let's say, on the market are privately owned. And for the time being, sellers are still expecting, let's say, the price of yesterday, and we are looking for the price of today. So there are, of course, the negotiation and tough moments. But globally, the market, I would say, is quite active in all the countries.

And we have also a second part, a second question. Slide 24 of the presentation shows property yields on new development. It has been impacted by between 0.3% to 0.8% during inflation. What level of inflation is this based on? And is this already included in your target-stabilized NOI yield?